Even if you’re too busy working on building your business to follow the news much at all, you’ve likely heard a lot of buzz about the “Inflation Reduction Act” this past year.
It promises to do a lot of things. But with the end of the year quickly approaching and tax season right around the corner, we wanted to address the question: does the inflation reduction act raise taxes?
Hopefully, this post will address some concerns and help you make sense of the legislation and its impact on your small business, employees, and family.
What Is The Inflation Reduction Act
The Inflation Reduction Act (IRA) is legislation that was signed into law in August of 2022. It authorizes a wide range of spending, aims to reduce healthcare costs, and enacts several significant tax reforms.
While the IRA is a fairly new bill–it was only introduced in July 2022 before being passed and signed just one month later–it has its roots in the “Build Back Better” initiative of President Biden’s administration that began in 2020.
“Build Back Better” was a massive collection of government initiatives that looked like it would rival the programs of the New Deal from the 1930s. It had several components to it, but only a few were successfully passed. For example, the COVID-19 stimulus package titled the “American Rescue Plan” was signed in March 2021.
However, as the price of additional bills began to grow to over $3.5 trillion around December 2021, Joe Manchin, a key Democrat Senator from West Virginia withdrew his support and said he would vote “no”. Without him, Democrats in the Senate didn’t have a majority, and “Build Back Better” came to a halt.
Senator Manchin and Senate leadership continued to quietly debate in secret, though. The legislation that he ultimately agreed to support included much of the original “Build Back Better” goals and was renamed the “Inflation Reduction Act.”
What’s In The Inflation Reduction Act?
The IRA introduces several provisions designed to impact our nation’s economy and infrastructure and is written to be implemented over the next 10 years. It is also the largest climate action legislation ever passed. Here’s a brief breakdown of what’s in the Inflation Reduction Act:
- It extends subsidies to the Affordable Care Act for 3 more years.
- It introduces legislation designed to reduce prescription drug prices.
- It authorizes almost $240 billion in deficit reduction.
- It includes spending on climate change efforts of almost $400 billion.
- It provides $80 billion to the IRS for improvements and “tax enforcement” (more on that in a minute).
A USDA report on the Inflation Reduction Act says it is also aimed at providing funding for rural development and encouraging renewable energy use. Many of our clients are owners of agricultural businesses across West Tennessee who may find those sections particularly interesting.
For a deeper dive into the details, the Tax Foundation has written an article with plenty of details and analysis of the Inflation Reduction Act provisions.
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How Does The Inflation Reduction Act Raise Taxes?
It proposes to raise the revenue necessary for all the things it wants to accomplish through
- A 15% minimum corporate tax on companies making more than $1 billion annually
- A 1% excise tax on stock buybacks
- Increased “tax enforcement”
When the word “tax” appears that many times, people naturally get nervous. So let’s unpack what they mean by “tax enforcement.”
Over the past several months, reports that the IRS is preparing to hire an additional 87,000 agents have been circulating. It’s not a number the IRS has released, and it’s not officially mentioned in the Inflation Reduction Act. All the bill does is provide the agency with money; how they spend it will be largely up to them.
According to CNBC reporting in an article titled “Don’t Worry, the IRS Isn’t Hiring An ‘Army’ of New Auditors…”, the federal tax agency is severely understaffed already (8 million 2021 returns remain unprocessed) and is facing a loss of 50,000-80,000 workers over the next 10 years. The 87,000 number comes from an estimate by the U.S. Treasury Department that says they’ll need that many new employees to simply keep up over the next 10 years.
The IRS is open about its desire to increase the number of audits they conduct, and those additional agents will enable them to do that. As small business owners, we believe you deserve to be as prepared as possible.
That’s one reason we put together a post last year titled “Get Ready: The IRS Is Increasing Audits of Small Businesses”. Our tax experts work closely with all of our clients to keep them informed and make tax issues as stress-free as possible.
Does The Inflation Reduction Act Raise Taxes On The Middle Class?
Fact sheets from the White House on the Inflation Reduction Act state that the bill will curb inflation and help small businesses by “ensuring that the ultra-wealthy and large corporations pay the taxes they already owe.”
Yet, nonpartisan groups like the Congressional Budget Office (CBO) and others have stated that the bill will have no significant impact on inflation. An analysis done by Penn Wharton finds that “the impact on inflation could be positive or negative; regardless, it would be too small to be detectable” and “the impact on inflation is statistically indistinguishable from zero.”
What many believe could happen is that increased taxes and expenses related to green energy regulations imposed on large corporations will simply be passed along to middle-class consumers in the form of lower pay for employees, smaller investment returns, and higher prices for products and services.
The result is that the net income of taxpayers in the $50,000-75,000 range will likely be impacted the most, either directly through new taxes or indirectly through continued inflation…the opposite of what the “Inflation Reduction Act” was named to imply.
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